William Buiter was a member of the Bank of England's Monetary Policy Committee, 1997-2000. He is currently Professor of European Political Economy at the London School of Economics. He tells scary stories as well as Stephen King. From the Financial Times:Those whom the gods would destroy, they first make mad

... If the markets fear that the nays have thrown their toys out of the pram for the long term, the following scenario is quite likely:

The US stock market tanks. Bank shares collapse, as do the valuations of all highly leveraged financial institutions. Weaker versions of this occur in Europe, in Japan and in the emerging markets.

CDS spreads for banks explode, as will those of all highly leveraged financial institutions. Credits spreads generally take on loan-shark proportions, even for reputable borrowers. Again the rest of the world will experience a slightly milder version of this.

No US bank will lend to any other US bank or any other highly leveraged institution. The same will happen elsewhere. Remaining sources of external finance for banks, other than the facilities created by the central banks and the Treasuries, will dry up.

Banks and other highly leveraged institutions will try to unload assets at fire-sale prices in illiquid markets. Even assets not viewed as toxic before will become unsaleable at any price.

The interaction of a growing lack of funding liquidity and increasing market illiquidity will destroy the banks’ business models.

Banks will stop providing credit to households and to non-financial enterprises.

Banks will collapse, both through balance sheet insolvency and through liquidity insolvency. No bank will be safe, not even the household names for whom the crisis has thus far brought more opportunities than disasters.

Other highly leveraged financial institutions collapse on a large scale.

Households and non-financial businesses revert to financial autarky, among wide-spread defaults and insolvencies.

The government suspends all trading in financial stocks until further notice.

The government nationalises all US banks and other highly leveraged financial institutions. The shareholders get nothing up front and have to wait for an eventual re-privatisation or liquididation to find out whether they are left with anything at all. Holders of bank debt get a sizeable haircut ‘up front’ on the face value of the debt and have part of the remainder converted into equity that shares the fate of the old equity.

There are two Nordhaus' that show up in the green space on the internet. The one who co-wrote this piece (Ted) has a B.A. in history from Berkeley. The other one (William) has done a bit more C.V. buffing.From the Los Angeles Times:

As the election enters its endgame, Democrats and their environmental allies face a political challenge they could hardly have imagined just a few months ago. America's growing dependence on fossil fuels, once viewed as a Democratic trump card held alongside the Iraq war and the deflating economy, has become a lodestone instead. Republicans stole the energy issue from Democrats by proposing expanded drilling -- particularly lifting bans on offshore oil drilling -- to bring down gasoline prices. Whereas Barack Obama told Americans to properly inflate their tires, Republicans at their convention gleefully chanted "Drill, baby, drill!" Obama's point on conservation and efficiency was lost on an electorate eager for a solution to what they perceive as a supply crisis.

Democrats and greens ended up in this predicament because they believed their own press clippings -- or, perhaps more accurately, Al Gore's....MORE

Jim Cramer apologized Monday on "Mad Money" for recommending that his viewers buy Wachovia stock just two weeks ago, a recommendation he acknowledged was spurred by the appearance of his longtime friend and former boss, Wachovia CEO Bob Steel, on his program.On September 15, Cramer had Steel on the show and later advised viewers to buy Wachovia stock. Watch:

I let you down, cause I wasn't skeptical enough. I have to presume when it comes to banking right now there is no objective truth, just negative, just terrible things. I let my judgment of Steel cloud my thinking about Wachovia. Is he to blame? Did he take advantage of me? Perhaps yes. But ultimately I must be a firewall for you and this time I let the firewall down....MORE

When it comes to talk of market outlooks, one of the few places on the planet you might find some bonhomie and optimism is - believe it or not - in Kyoto, scene of the annual meeting of the London Bullion Market Association (yes, they’re still doing alright for themselves..)

As Javier Blas, the FT’s commodities correspondent, reports from the scene, the mood is definitely bullish, amid a joyously firm belief that gold prices will rise next year as the financial crisis pushes more investors into the precious metal safe haven.

The gold industry forecasts bullion prices at about $958.6 a troy ounce by November next year, according to the annual LBMA poll among delegates. The poll, which has been a reliable indicator in the past, compares with current prices just above $902 (on Tuesday, spot gold drifted lower to $900.90, down 0.3 per cent at 0410 GMT)....MORE

From the FT's Lex column:

Gold

The financial meltdown has gold bugs buzzing with delight. Often slightly eccentric, gold investors have long warned that the end is nigh. Today, however, their fears are being discussed at dinner tables across the world. As markets have tumbled over the past fortnight, the price of gold has rallied by about a fifth to almost $900 per ounce. Over the medium term, however, there are many reasons to limit the number of bars being buried in the garden.

Certainly gold looks like a one-way bet for now. Due to its relative rarity and indestructibility, gold is a perceived safe haven in times of crisis. Inflows are pouring into gold-backed exchange traded funds and the ultimate doom-sayers are hoarding the physical metal. More important, however, gold as a monetary asset is benefiting from a weak dollar and high inflation....MORE

Deleveraging is Deflationary. Ignore the talk of any immediate Inflationary effect. That comes later. Anyone telling you to buy gold now is a fool, a liar, a knave or a nut. The time for AU will come but it is most assuredly not now.

Gold promptly went up 5%.Gold is not a hedge against deflation. Over the years goldbugs have come to believe it is, based on the performance of Homestake Mining's stock during the Great Depression. Here's an example from Gold Eagle:

Gold Stocks did well during the Great Crash and aftermath… indeed exceedingly well. Please note that from August through October 1929 Homestake Mining did decline in value, but no where near the percent plunge in the general stock market. And by yearend Homestake was again creeping up in price. For the first few months of 1930 the gold mining industry proxy was relatively flat. However, from mid-year on Homestake began to increase in value as the DOW and DJUA rapidly and relentlessly melted away. During the next five years the Gold Mining Industry's surrogate soared in value - while stock prices were decimated by the Great Depression.

It is relevant to observe that Homestake's price appreciation was not a market anomaly, but was consistent with its growing annual earnings per share and increasing cash dividend payout. Yearly E.P.S and cash Dividend payout data may be seen in the above Homestake chart. While nearly all industries revenues and earnings dwindled, the gold mining industry thrived. Homestake's E.P.S. increased from $4.19 in 1929 to $32.43 in 1935. During the six desolate years of the Great Depression, the gold mining industry's proxy enjoyed an E.P.S. growth rate of 41% COMPOUNDED ANNUALLY. Furthermore, while the banks paid a paltry 1% in "earned" interest on the meager savings of those few hapless souls who still had money, Homestake share holders were indeed enriching themselves. The 1929 cash dividend of $7.00 increased to a cash payout of $56 PER SHARE BY 1935. Consider for a moment the awesome investment significance of it.

Had an investor the foresight and guts to buy a share of Homestake in the throes of the 1929 Crash, he would have gotten it for about $80. During the next six years while stock values worldwide were melting away - and preciously few companies were able to pay even a declining trend of dividends - Homestake soared relentlessly to $495 a share by yearend 1935 - THAT'S NEARLY 520% CAPITAL APPRECIATION (34% compounded yearly increased value). And during the six depression years of international economic suffering, Homestake paid out $128 in cash dividends. In 1935 alone, the gold mining proxy paid a $56 cash dividend per share - which represented 70% of the 1929 Crash Price of the stock!

Many market analysts and financial students erroneously suggest that US president, Franklin Delano Roosevelt's action of increasing gold's value in 1934 from $20.67 to $35 an ounce was the prime reason for Homestake's stellar performance during the Great Depression. NOT SO. Please observe the Homestake chart again. Homestake's stock price was rising strongly much before FDR's decision to stimulate fallen commodity prices by increasing gold's value. Nevertheless, gold's price hike did indeed add more impetus to Homestake's dynamic performance, while world economies continued to struggle in the morass of deflation.

To put the relative market performances of the stock market vis-à-vis gold mining shares into proper perspective, please view the following two charts superimposing the DOW with Homestake and the DJUA with Homestake. There is absolutely no room for mis-intepretation - THE ONLY PLACE TO BE IN DEFLATION WAS IN GOLD STOCKS.

That is rather enthusiastic and more accurate than most analyses, at least he focuses on the equity rather than the metal. But the focus is still wrong.After the mine closed in 2002 I went out to Lead to answer the question "Is gold an asset you want to own during deflation?" I was quite possibly the last person with access to the company records from the '30's. The skeleton staff that Barrick had in place for the shutdown were literally boxing documents for the archivists as I sat there.

There were three contributors to the move in the stock price:1) A high-grading mining strategy proposed by a young engineer, Don McLaughlin in the late '20's began bearing fruit in the form of higher recoveries. Mr. McLaughlin went on to the presidency of the company.2) A flight to safety after the October 1929 stock market crash.3) The Gold Reserve Act of January 30, 1934 raised the price of gold 69%, from $20.67 to $35.00 (conversely devaluing the dollar by 41%).3a) Homestake was thus paying salaries and other expenses in devalued dollars.This combination of more gold produced, higher price per ounce and lowered expenses (in real terms) was what moved the stock, not some inherent magic in gold.

A good explication of gold's valuation is Roy Jastram's study of the purchasing power of gold, "The Golden Constant: The English and American Experience, 1560-1976". The main point is that gold tends to retain purchasing power over long periods of time. A secondary point is at apparent varience with my conclusion. Jastram says that gold's purchasing power increases under deflation.The apparent contradiction is resolved by the knowledge that during his period of study, gold was money. During deflation, any unit of money increases in purchasing power. No one backs their money with gold, that link is broken.

Friday and yesterday's flight to safety move up has been largely reversed, today, gold is down $29.30. From KitcoClick to enlargeGold will shine but not until the printing presses have overcome the contraction in credit/money.In the meantime, if you are of a mind to invest for the Apocalypse, buy some bullion silver coins or Silver Eagles. The lower valuation should make buying a fifty pound sack of flour easier than it would be with an ounce of gold.

Spanish solar power companies that stay on the sidelines of the wave of consolidation that will soon sweep the industry could go out of business, according to a number of executives surveyed by mergermarket.

The managers also said that the new regulatory framework for the sector will lead to the withdrawal of foreign investors and the need for survivors to invest aggressively overseas.

The executives said they did not believe that foreign investors would use the new framework as an excuse to enter the market through acquisitions. Indeed, some of the managers said that foreign investors are leaving Spain and heading for countries such as Greece and Italy instead.

“More than 80% of the companies will have to close,” Blaen Director General Francisco Blasco said, adding that 400,000 jobs would likely be lost in the sector by Christmas...MUCH MORE

Monday, September 29, 2008

Regional banks stock slipped Monday as investors wondered what bank would be acquired next. News that Wachovia Corp. was acquired by Citigroup Inc., investors lack of confidence in the banking system and the House's rejection of the $700 billion bailout plan drove down stocks. National City Corp.'s stock dropped more than 50%, and Sovereign BankCorp. Inc.'s stock dove over 60%. - Maria Woehr

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''>>>MORE

...By the end of 2007, prices had fallen 10% from the peak, and 8.2 million homeowners owed more on their mortgages than their homes were worth.

As of Q2 2008, prices had fallen almost 18% from the peak, and for the graph, I estimated that prices will decline about 22.5% from the peak by the end of 2008. (this seems conservative). This means about 15.4 million households will be underwater or already foreclosed on by the end of 2008.

The last two categories are based on various estimates for the price bottom (peak-to-trough). The 30% decline was suggested by Paul Krugman in December 2007: What it takes). The 35% decline is close to the "severe recession" case presented by JPMorgan last week....MORE

Two weeks ago, Wall Street titans and the government's most powerful economic stewards made a fateful choice: Rather than propping up another failing financial institution, they let 158-year-old Lehman Brothers Holdings Inc. collapse.

Now, the consequences of that decision look more dire than almost anyone imagined....MUCH MORE

Monday's market plunge may have been the worst point drop ever for the Dow Jones Industrial Average but in percentage terms it came nowhere close. It dropped 7% on Monday, or just one-third as much as the 22.6% decline in the 1987 crash.

In fact, there have been 16 other occasions since the Dow was created in 1896 in which the Dow's percentage drop was greater than it was Monday. That works out to an average of every seven years.

It furthermore has been almost exactly seven years -- Sept. 17, 2001 -- since the last time the Dow dropped by a greater amount than it did on Monday.

From at least one statistical perspective, this all adds up to Monday's drop being overdue....MORE

Today's 777 point loss on the DJIA is the largest point loss ever. I don't think it is in the top ten largest percentage losses, I haven't looked. However, as Tech Trader Daily points out, the Nasdaq's losses definitely are. A sixty percent retracement of today's (and tomorrow's?) decline is well within the bounds of possibility (I won't go all Fibonacci on you). Then lower.From the Big Picture:Yes, Virginia, this is a crash

Nasdaq down 8%, S&P500 off 7.93% Dow off a mere 6%. Set your downward targets to SPX 975, plus or minus. That is both a technical target (breakout in 2003) and fundamental target (15X $65 SPX Earnings)...MORE

From MarketBeat:Four at Four: The Market Gets Nothing, and Doesn’t Like It

Posted by David Gaffen

A Bad Day All Around

Index

Close

Change

Dow

10365.45

-6.98%

S&P 500

1106.42

-8.79%

Nasdaq

1983.73

-9.14%

Oil

$96.37

-9.8%

Gold

$888.20

+0.6%

Euro/Dollar

$1.4465

-0.8%

Dollar/Yen

104.27

-1.59%

Criticism of the bailout plan in the form it morphed into over the weekend was rife — some were concerned about the equity participation, some about the hesitant structure — but most were of agreement that something was better than nothing. Instead, the market got a whole lot of nothing Monday, as the bill was swallowed by partisan bickering and strange attempts to blame the House speaker for ruffling feathers. “We had taken for granted that we had a bill passed and we are shocked to find out that was not the case,” says Art Hogan, chief market strategist at Jefferies & Co. “Now we need to see if we can get back to the drawing board and get something passed this week.” What resulted Monday was the 17th-worst percentage-point loss for the Dow industrials in history, as the 30-stock average lost nearly 7% of its value in a session fraught with peril, one where the selling picked up at the end of the day, in what some called “forced” liquidation of positions. “If you watched the S&P at the end of the day, it went from down 81 points to down 99 in a moment – it was very big and very bad, right at the end of the day,” says Kim Caughey, portfolio manager at Fort Pitt Capital Group in Pittsburgh...MORE

Without the Paulson plan, or if the plan is so watered down and delayed, I have been saying all bets are off and we could be in for a huge swoon. How huge?

I like to sit down and noodle on the actual components of the Dow Jones Industrial Average to give you a real sense of what can go wrong. And there is so much going wrong. The credit markets are vanishing, the earnings are vanishing and the only hope is a plan that ignites credit markets, forces money off the sidelines and gets this economy and the worldwide economy moving again....MORE

Earlier today I reposted a classic cartoon from the New Yorker (scroll down or use the Blog Search Box for cartoon) that graphically shows how bear markets can trick you. A real bear will keep teasing until it has sucked every dollar available from the buyers by appealing to the hope that "This is the bottom".

Credit Writedowns had a page of eight DJIA charts that give a stark portrayal of how relentless the '29-'32 down move was. From 381.17 to 41.22 in 33 months. Anyone who was fully invested on September 3, 1929 and rode the whole rollercoaster waited much of their adult life before the DJIA got back to 381 in 1954. I'll put the link to their homepage below the charts, click any chart to enlarge. And no I don't think we're in for an 89% decline. But it could be 40% from the 14,164 closing high last October. That's the same order of magnitude as the '73-'74 bear (although with inflation that was a 70%+ loss of buying power).Dow 8500 is well within the realm of possibility. From today's 10,609 close that is a nasty prospect....CHARTS

...So we can look for a bounce but think of these names as a trade; bear markets can suck you in. When I first came to the market, one of the older traders told me he was saved in the '73-'74 bear by a cartoon:(click to enlarge)That's Alfred Frueh's January 16, 1932 New Yorker classic, "Just around the Corner", commenting on President Hoover's statement that "Prosperity is just around the corner".

While Congress was busy debating and voting down the $700 billion financial rescue package, one of the key arguments against the bill was that our voted officials didn't feel right risking $700 billion in taxpayer money on a 'bailout' of the Financial sector. In voting the bill down, our elected officials may feel like they have done their constituents a service by protecting their money.

However, with a decline of 6% today, the S&P 1500 has now erased $746 billion in market cap alone. This doesn't even take into account the lost GDP that is likely to result from the continued deep freeze in the credit markets....

Welcome back, my friends, to the show that never ends.We’re so glad you could attend.Come inside! Come inside!There, behind a glass, is a real blade of grass,be careful as you pass.Move along! Move along!

Cold and misty morning, I heard a warning borne in the airAbout an age of power where no one had an hour to spare,Where the seeds have withered,silent children shivered, in the cold.Now their faces captured in the lenses of the jackals for gold.

My Biggest FearWithout question, my biggest fear since the Credit Crisis began, even while watching the events that led up to it—the absurd levels of debt on every front, the creation of esoteric instruments based on bad debt—has been what would happen once the Credit Crisis unfolded. That fear was deflation; something that I sense is now upon us. You may not be familiar with deflation since it hasn’t been seen in this country since the 1930’s. So in case you are not familiar, I have provided a definition below. I believe the deflation situation that we are facing today in our nation is clearly defined by Investopedia:

Deflation: A general decline in prices, often caused by a reduction in the supply of money or credit....MORE

One point that Mr. Savitz's interviewee doesn't mention is that among the Chinese solars are some that are not cash flow positive. Raising capital in this environment is going to be tough, a couple may become insolvent, be forced into an inopportune merger or have to scale back expansion plans. Trina won't be among the first or second groups* but may be in the third.From Tech Trader Daily:

Solar stocks are getting an especially ugly drubbing on a very nasty for stocks overall, on news that Congress is unlikely to approve an extension to solar energy investment tax credits before the November election, and possibly not until a new president is sworn in early next year.

...To fuel the expansion, Trina Solar's capital expenditure is expected to rise to $250 million in 2009 from $200 million this year and reach $350 million in 2010, with funding coming mostly from internal resources, he said.

"Our cash flow is enough to fund our expansion until 2009. I believe our operating cash flow will increase further in 2010, enough to supply our expansion needs," said Gao, who is also the firm's chairman....MORE

Ah, ah,We come from the land of the ice and snow,from the midnight sun where the hot springs blow.The hammer of the godsWill drive our ships to new lands,To fight the horde, singing and crying:Valhalla, I am coming!On we sweep with threshing oar,Our only goal will be the western shore.

...Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk....

The Wall Street Journal's Real Time Economics blog has the roundup, the headline was my contribution to the Onionization of America. From Real Time Economics:

Secondary Sources: Bailout, Bailout and More Bailout

What’s Next: Writing for the Financial Times, Larry Summers looks at the budgetary implications of the bailout plan, echoing the point that the proposal won’t substantially effect the deficit if enacted correctly. “The worst possible actions in the current context would be steps that have relatively modest budget impacts in the short run but that cut taxes or increase spending by growing amounts over time. Examples would include new entitlement programs or exploding tax measures. The best measures would be those that represent short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget. Examples would include investments in healthcare restructuring or steps to enable states and localities to accelerate, or at least not slow down, their investments.”

Nothing New:Robert Shiller in the Washington Post says that a government hand in the markets is nothing new....MORE

Friday, September 26, 2008

It's happened again. We see a link on another site, open it in a new tab and forget where we were tipped to what turns out to be a great post. Sorry. If it was your site, email us for linkage, tippage, and professions of lovage (not to be confused with lavage. Seriously)From 538.com:

There's something funny going on over at Intrade with respect to the pricing of the Obama and McCain contracts.

Right now, Obama is trading at 52.3 points. That is, Intrade implies that he has a 52.3 percent chance to become the next President.

Now, I happen to think that is a patently absurd price. But you don't have to take my word for it. Over at BetFair, another large UK-based gambling and futures site, you can also buy an Obama contract. But the price there is 1.62, which implies a 61.7 percent chance that Obama will become the next President.

That is a huge spread, 51.5 points versus 61.7 points. This is the equivalent of the Giants being 3-point favorites at the Bellagio Sportsbook, and 7-point favorites at the Mirage down the block. Those things just don't happen in efficient, sufficiently liquid markets, because they create arbitrage opportunities: you'd lay $10,000 on the Giants at the Bellagio and $10,000 on their opponents at the Mirage. Any time the Giants win by fewer than 3 points or more than 7 points, you lose nothing, since your two bets cancel out. But any time they win by fewer than 7 points but more than 3, you win both bets, and take home $20,000 (less the casino's vigorish) for absolutely no risk. Pretty good deal, right? That's exactly what's happening with these futures contracts....MUCH MORE (everything for the political junkie or for those who want to take financial advantage of one)

Here's Lovage "Book of the Month"(don't adjust your set, we are in control here):

SunPower Corporation(Nasdaq: SPWR), a Silicon Valley-based manufacturer of high-efficiency solarcells, solar panels and solar systems, today announced that the last reportedsale price of its class A common stock on at least 20 of the last 30 tradingdays during the fiscal quarter ending September 28, 2008 has equaled orexceeded $70.94, which represents 125% of the conversion price for one seriesof its outstanding senior convertible debentures. Accordingly, pursuant tothe terms of the indenture governing its $200 million aggregate principalamount of 1.25% senior convertible debentures due 2027, the market priceconversion trigger has been satisfied and the debentures may be converted atthe holders' option during SunPower's fourth fiscal quarter endingDecember 28, 2008.

Although the market value of the debentures relative to the value holderswould receive upon conversion has declined during the third fiscal quarter,the current market value of the debentures remains in excess of the conversionvalue. Accordingly, if the market value of the debentures remains at theselevels, holders might not have an economic incentive to convert theirdebentures. The current capital market conditions, credit environment, andthe recent prohibition on "naked" short selling announced by the U.S.Securities and Exchange Commission could, however, create incentives forholders to convert their debentures that did not exist in prior quarters.

Pursuant to the terms of the indenture, the principal amount of anydebentures surrendered for conversion must be settled in cash. To the extentthat the conversion obligation exceeds the principal amount of any debenturesconverted, SunPower must satisfy the remaining conversion obligation of the1.25% senior convertible debentures due 2027 in shares of its class A commonstock....

Sweet headline from Environmental Capital. Here's their take on the state of the subsidies:

Put away the champagne, and park those plans to buy new solar panels for the roof.

The House passed its version of the energy and tax package, which is different from the Senate version and which isn’t to the White House’s liking.

That means, for all intents and purposes, that the long-awaited renewal of tax credits for renewable energy are on hold again—unless the House and Senate can somehow reconcile their different versions over the weekend and avoid a White House veto. The other alternative is that Congress comes back for a tenth time in a lame-duck session after the election to try to tackle energy tax policy again....MORE

In another part of the Dow Jones empire, Eric Savitz posts, without the picture of the Veuve Clicquot brut (that yellow label is recognizable at 100 paces):

We've seen estimates that the bailout is a minimum $500 Billion light. This is the first time for $5 Trillion.From Naked Capitalism:

Swiss investor Marc Faber, known for a long track record of good calls (he was a commodities bull until late this spring, for instance, when he reversed his view) and a fine grasp of financial markets history, confirms the estimate earlier in the week by Ken Ohmae that the US needs a salvage operation much bigger than the one envisaged by the Treasury plan, and the damage may come to $5 trillion:Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government's rescue package for the financial system may require as much as $5 trillion, seven times the amount Treasury Secretary Henry Paulson has requested....

``The $700 billion is really nothing,'' Faber said in a television interview. ``The treasury is just giving out this figure when the end figure may be $5 trillion.''...MORE, including a link to the video.

It's not the same bill passed by the Senate so the next step is a conference committee. Not that it will matter to the equities, right now the market's attention seems focused elsewhere.From Reuters:

The House of Representatives approved legislation on Friday to extend billions of dollars in tax credits for wind, solar and other renewable energy sources.

The House measure is similar to energy legislation cleared earlier this week in the Senate, except that the House bill leaves out tax incentives to develop oil from shale and tar sands and for projects to turn coal into liquid fuels....MORE

Washington Mutual Inc. bondholders are likely to lose most of their money after the thrift was seized in the largest U.S. bank failure in history, according to CreditSights Inc.

WaMu was taken over after customers withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday. New York-based JPMorgan Chase & Co. then bought WaMu's branch network for $1.9 billion to become the biggest U.S. bank by deposits. JPMorgan won't acquire WaMu's liabilities, including claims by senior and subordinated debt holders, according to the Federal Deposit Insurance Corp.

``It seems that WaMu's major debt holders have been stranded by regulatory intervention,'' David Hendler, an analyst at bond research firm CreditSights in New York wrote in a report today. ``The deal structure seems to be unprecedented in that it excludes bondholders at the holdco and bank levels from the major assets and liabilities of the operating bank.''>>>MORE

With most of Washington Mutual Bank's assets now owned by JP Morgan Chase (JPM), how much available cash remaining at WaMu's holding company to fund potential recoveries for the senior debt holders remains to be seen, according to Fitch Ratings, which downgraded WaMu's Issuer Default Rating (IDR) to 'C' from 'B-', reflecting the likelihood of default. The ratings are also placed on Rating Watch Negative.

A complete list of affected ratings follows the end of the press release.

Last night, the Office of Thrift Supervision closed Washington Mutual Bank (WMB), citing significant deposit outflows since Sept. 15, 2008. The FDIC was named receiver. Most of the bank's assets, including its loans, all of its deposits and select other liabilities were purchased from the FDIC by JPMorgan Chase Bank, NA last night>>>MUCH MORE

I'm not sure that having speculators and financial intermediaries romping about in the carbon markets is a societal good but what the hell, I'm tired of watching politicians and bankers deal with the last mess, on to the next one!Plus, we can liberate the hausfrau's pin money for higher purposes like reliquifying banker's and broker's balance sheets. Win, win (well, except for the hausfrau)From Reuters:

The fund is managed by investment firm Acquila Capital of Hamburg, which will use the research and market expertise of First Climate, a carbon asset management firm and consultant to international organisations, based near Frankfurt.

"The CO2 market is in an early development phase. As an investment house and pioneer for alternative investments, we know that opportunities and possible uncertainties can be very high. This makes professional management all the more important," said Dieter Rentsch, managing partner at Aquila, in a statement.

A spokeswoman for Aquila said the fund would invest directly in European emissions allowances (EUAs), where it was taking a long position....MORE

UPDATE:HEREFT Alphaville quotes Royal Bank of Scotland as expecting very little recovery:

...Either way, recovery values are going to be pretty grim and low to mid-single digit looks to be likely.

There is now a precedent set which is taxpayer friendly and 100% risk asset hostile.

There’s confusion as to which WaMu debtholders may have been saved by the JPM deal. There may be none - there may be some. It all depends on which part of WaMu the debt was issued from and whether JPM has bought that part. It isn’t really clear where WaMu’s $11bn covered bond programme falls, either

As of yesterday, there was around $28bn of WaMu bonds in issuance, from a range of different companies and subsidiaries under the WaMu parent company.

Here is a list of the top WaMu debt holders, and the sizes of their holdings. Lots of insurance companies.

As theories swirl around Monday's unprecedented jump in oil futures, U.S. government officials suggested that a financial trader was responsible, though market participants suspect an oil producer might have been caught in dire need of extra barrels.

Before the contract expired at the close of trade Monday, crude for October delivery surged more than $25 to $130 a barrel on the New York Mercantile Exchange, stunning traders and prompting an inquiry from the Commodity Futures Trading Commission, which has subpoenaed traders.

The contract settled $16.37 higher at $120.92 a barrel. (Wednesday, Nymex crude for November delivery fell 88 cents a barrel, or 0.8% to $105.73.)

But who powered the surge, or was burned by it, remains a mystery....MORE

More from the "there are no new problems, only our problems" drawer, the Sept. 23, 1908 NYT reports:

"Europeans believe that the world panic of last Autumn was caused by our banking system; that there is no assurance against a recurrence of the trouble until the banking system is reformed. And I agree with Europeans," remarked Jame B. Forgan, President of the First National Bank, upon his return from a trip abroad today. He continued:

"Over there in Europe, when a monetary scare occurs and spreads, there is at once a unanimity of action among bankers. Money begins to flow to the country's financial centre. The Bank of England, for instance, raises its discount rate; it gets gold from everywhere; the monetary resources of the country are laid under contribution for the benefit of the big bank or banks. The people are then shown the strong position of the large institution or institutions, and are calmed thereby.

"Here in the United States we are the victims of a process the direct reverse of that obtaining abroad. when apprehension seizes the Nation our one or two big piles of cash are pounced upon by a myriad of little bankers throughout the country, who make hundreds of piles of them, and who, after getting the money, do nothing but stare at it, having really no use for it....MORE

Washington Mutual (WM) failed yesterday and most of its assets where sold to JP Morgan (JPM). The price was $1.8 billion. JPM will have to write down $31 billion in badloans, but, since Jamie Dimon is now the king of the banking world, he should be able to raise the capital to cover that. In the meantime, he has picked up $307 billion in assets.

According to The Wall Street Journal, "The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise." The people who get drawn-and-quartered in the process are the WaMu bondholders and those who own the common stock. Washington Mutual shares were at over $36 a year ago. Now, they are worth nothing. About $50 billion in market cap has been destroyed....MORE

Thursday, September 25, 2008

Asian share markets are mostly lower Friday with U.S. stock futures falling as uncertainty grows again on whether Congress will agree on a deal for authorities to buy toxic debt from U.S. financial firms.

U.S. stock futures are now down more than 1% in screen trade and Japan's Nikkei 225 has erased its early modest gains, and was last down 0.5%.

Deal or no deal is the main question being asked by markets. Only hours after it seemed that something would be in the bag soon, lawmakers are again squabbling over the details and indeed the overall merit of the plan.

Federal Reserve chief Ben Bernanke and Treasury Secretary Henry Paulson have headed back to Capitol Hill to try and shore up a deal, but senior Democrats and House Republicans are both making noises of concern about the cost involved, the impact on taxpayers and the detail of how the plan would actually work.

Any deal, if it eventuates, may be a pared-down version of the original plan, with strings attached to ensure oversight and transparency....MORE

From the FDIC:...JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

...Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver. WaMu customers with questions should call their normal banking representative, service center, 1-800-788-7000 or visit www.WaMU.com. The FDIC's consumer hotline is 1-877-ASK-FDIC (1-877-275-3342) or visit www.fdic.gov.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information which should answer many of your questions.

New York, September 25, 2008 - JPMorgan Chase & Co. (NYSE: JPM) will host a conference call at 9:15 p.m. (Eastern Time) tonight, September 25, 2008. You may access the conference call by dialing 1-877-238-4671 (U.S. and Canada) / 1-719-785-5594 (International) - access code: 814030 or via live audio webcast at www.jpmorganchase.com under Investor Relations/Investor Presentations. Materials and further communication will be available on this website at the time of the call.

A replay of the conference call will be available beginning at approximately 1:00 a.m. on September 26 through midnight, Thursday, October 9 by telephone at (888) 348-4629 (U.S. and Canada); access code: 942856 or (719) 884-8882 (International). The replay will also be available via webcast on www.jpmorganchase.com under Investor Relations, Investor Presentations.

JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.8 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the firm is available at www.jpmorganchase.com.

Negotiations on a $700 billion proposal to inject new capital into the paralyzed credit markets stalled after House Republicans offered a different solution to the financial crisis.

Senate Banking Committee Chairman Christopher Dodd said the agreement in principle he had reached earlier in the day with some Republicans was later undermined by a proposal offered by House Republicans led by Representative Eric Cantor.

Dodd said that if Treasury Secretary Henry Paulson backs Cantor's plan, then negotiations would ``have to start all over again.'' Talks are to resume tonight, Dodd said at a press conference.

The proposal that Dodd, Paulson and Federal Reserve Chairman Ben S. Bernanke had been pursuing would have the federal government buy troubled assets from financial companies.

The plan circulated by Cantor calls for a mortgage-backed security insurance fund, rather than taxpayer-funded purchases of those securities. The plan calls on the Treasury to design a system to charge premiums to MBS holders to finance the insurance, according to a fact sheet....MORE